If you have discussed your investments with a financial planner from The Financial Advisors Association of Canada, chances are your advisor has suggested segregated funds. But what are seg funds and how do they differ from traditional mutual funds?

A seg fund is actually an insurance contract with two parts: an investment that produces the return and an insurance policy that covers the risk. The seg fund is like a mutual fund, because you are pooling your money with other people to share investment gains. But because life insurance companies issue segregated funds, there is a guarantee attached that protects the investor’s principal from sudden market declines. Think of such an investment as a mutual fund with a safety net.

A built-in guarantee
Insurance companies are required by law to build added protection into investment products. Seg fund policies guarantee that most of your initial investment is protected in the event of death or at the time of maturity. Depending on the provider, this guarantee may vary from 75 to 100 per cent of the principal amount.

For example, if you invested $25,000 in a 10-year seg fund policy with a 100 per cent guarantee, you would receive your initial investment plus profits made from market gains at the time of maturity. If the value of the seg fund policy has fallen below $25,000 at maturity, the principal remains protected. You can periodically “lock in” the protection on the principal when the policy has escalated in value. This resets your 10-year guarantee period.

History of segregated funds
Seg funds were first introduced by insurance companies more than 30 years ago as a fixed income product for pension funds. Later they were offered to investors as a creditor-proof investment. Although they invested in stock markets, they were considered to be conservative products very prudently managed.

In the late 1990s, mutual fund companies began teaming up with insurers to boost the investment return potential. Seg funds began to look more like mutual funds, with sectoral funds, index funds, and foreign funds added to the mix of investments. As interest rates dropped, more conservative investors moved from term deposits and GICs into seg funds because of the guarantees.

Seg fund or mutual fund
Whether a particular seg fund is any more or less attractive than a mutual fund, however, will depend on your personal circumstances, and the investment strategy that you have worked out with your Advocis financial advisor.

Like mutual funds, segregated funds contain a diversified group of solid investments. They come in various sizes and asset mixes, and benefit from the experience of a qualified portfolio manager. Where the two types of funds part company is in flexibility and the added cost of insuring the principal.

Entrepreneurs and small business owners may want to consider the potential creditor protection offered by seg fund policies. Because they are insurance policies, they enjoy creditor protection under provincial insurance legislation.

The cost of a guarantee
While a disciplined, long-term approach to the market is always advised, a guarantee is not for everybody. Some investors may not want to incur the added cost of guaranteeing the principal invested in a seg fund. That cost varies depending on the insurance company.

Some seg funds have higher management expense ratios than mutual funds. Some guarantee only 75% of principal, to keep the MER lower. Some make the 100% guarantee an option that the consumer can pay for.

Some investors see such a guarantee as unnecessary since it is highly unlikely that market values will be lower than the principal investment over any 10-year period. Others view the added cost as an investment in peace of mind.

Seg fund advantages
There are other advantages to a seg fund policy.

One is the reset option. As a seg fund investor, you can protect profits inside the fund. What it does is allow fundholders to lock in gains when market values are high. If, for example, your $50,000 seg fund policy has increased in value by $11,000, you can use the reset option to protect the full $61,000. Once again, the reset option is not for everybody since it also resets the 10-year clock on the fund’s guarantee.

Seg fund policies are also a solid estate planning tool. Upon death, the market value or the guaranteed principal is paid out directly to the beneficiary without being subject to provincial probate fees.

When the economy (and financial markets) are at it’s extremes, either doing extremely well or extremely poorly, dangerous financial products and ideas become more prevalent. And right now we are seeing an increase in Offering Memorandum products.

Portus, Eron Mortgage Corp, Shire International Real Estate Investments, and Arbour Energy and just a few Canadian examples. The one common denominator they share, is they all are catagorized as Exempt Market Securities.

What are Exempt Market Securities?

…when companies (issuers) sell securities such as stocks, options, or bonds, they are generally required to file a prospectus. This document contains material facts about both the issuer and the security. However, in certain cases securities can be sold without a prospectus and these investments are called exempt securities; the sale is called an exempt distribution or a private placement.

What should I know about Exempt Market Securities?

These investments are not for everyone. A prospectus is meant to ensure an investor has key facts to be able to make an informed decision. Without it, you may be taking a greater risk with your money. Be aware that:

-If you buy an exempt security, you may not have the same legal rights as you do under a prospectus.

-Most exempt securities are subject to resale restrictions. This means you may not be able to sell them for a certain period of time.

-Even if no resale restrictions apply, there might not be a market for the securities you purchased, either because you would not be able to find any purchasers or they may not qualify to purchase the securities.

-Some exempt securities are not liquid. Liquidity means that you can sell an investment in a short period of time and turn it into cash. Some exempt securities, such as hedge funds, may require longer periods to redeem.

-Because these investments are bought without a prospectus, there may be very limited information available on which to base your investment decision.

-When an issuer sells its exempt securities, it may not use a registered dealer as an agent. This means, when you buy from an issuer, you may not get the same protection you would get when you buy from a registered dealer.

–from a release by the Nova Scotia Securities Commission and cirrulated by the other regulators. (footnote 1)

A disclosure document put out by the BCSC includes this simple explanation (footnote 2):

They are called exempt market securities because two parts of securities law do not apply to them. If an issuer wants to sell exempt market securities to you:

-The issuer does not have to give you a prospectus (a document that describes the investment in detail and gives you some legal protections), and
-The securities do not have to be sold by an investment dealer registered with a securities regulatory authority.
There are restrictions on your ability to resell exempt market securities.Exempt market securities are more risky than other securities.

Disclosure documents (be it a Prospectus, when regulated by the Securities Act, or a Policy Contract/Information Folder, when regulated by the Insurance Act), exist for a reason, To protect the investing public. There is no evidence proving the absentence of disclosure documents increases potential return, but it is well known to increase risk.

Policy Contracts and Prospectuses are the financial world’s equivalent to seat belts. Hopefully you won’t have to depend on them in a life or death situation. The best option for most regular folks is to just avoid these dangerous investments. Just like it always advisable to wear your seat belt.

Vancouver, BC – BC Notaries support the Province of B.C.’s proclamation declaring April 6 to 12, 2015 “Make a Will Week” to encourage residents who don’t have a Will to create one to ensure their final wishes are clear and carried out after their death.

A survey conducted province-wide just a year ago by Mustel Group for The Society of Notaries Public of BC found that only 55% of British Columbian adults have a current and legal Will, and people under 54 are the least likely to have one. The March 2014 omnibus telephone poll[1] of 502 adults in BC found that 20% of people in the 18-to-34 age range, 51% between 35 and 54, and 83% of individuals 55+ have a Will in place.

BC Notaries shared five reasons people under 50 should create a legal Will.

1. Do you have dependant children?

A Will enables you to designate who would care for your dependent children if you die This is particularly important for single parents or blended families where the law may not align with your wishes. If you don’t designate custody, the decision may be made by a stranger through the court system

2. Are you a homeowner?

If you share ownership of your home with a partner or others, it’s important to understand how you own property. There are various ways shared ownership can be structured, and that structure impacts what happens to the ownership of your home if you die. Your local notary can do a title search for you and discuss the various options available to ensure your wishes are possible, and your Will is clear.

3. Are you separated, divorced or living in a common-law relationship?

Creating a Will, and ensuring all your documents are up-to-date is very important for the many people whose relationship status has changed. This will ensure that your assets are divided or assigned as you currently wish them to be.

4. Do you have pets?

For many British Columbians, pets are family. Many people want to ensure their pets will continue to be cared for as they as they are now, even or especially if something were to happen to them. A Will came designate those provisions.

5. Peace of mind

Life is stressful enough. Creating a Will gives you and your family peace of mind that those your assets will go to those you love, and your wishes will be followed. For most people creating a Will takes only one or two or three short visits with your Notary, and gives you confidence in your and your family’s future.

I want to file my taxes and get my refund, but I’m still waiting for tax slips for a few REITs and ETFs that I own. Shouldn’t I have this information by now?

Not necessarily. Different types of tax slips have different mailing deadlines.

T5 slips – which report dividend and interest income – were supposed to be mailed out by the end of February, so you should have these by now.

But T3 slips – which report distributions from income trusts (including real estate investment trusts), exchange-traded funds and mutual funds – have a deadline of March 31. So it could be a week or more before they land in your mailbox. T3s for REITs and ETFs are sent by your broker, whereas T3s for mutual funds are mailed directly by the fund company.

Occasionally, tax slips are delayed, however.

My discount broker, BMO InvestorLine, says on its website that it will “make every effort to ensure that tax slips are mailed by the date indicated; however, in the event that an issuer does not supply us with the necessary information in time, tax slips will be processed on an individual security basis and mailed as soon as the information is made available.”

I had a quick look on the websites of three ETF providers – iShares, BMO and Horizons – and the 2014 tax information has already been posted. I also checked the websites of three REITs – RioCan, Canadian REIT and Calloway – and they have also published the 2014 tax breakdowns for their distributions. So if you want to crunch the numbers yourself, you can. But to avoid mistakes on your return, you might want to wait until the official T3 slips arrive.

In the meantime, if you’re using tax software, you can always complete the rest of your return and then spend a couple of minutes entering the information from your T3 slips when they arrive. That way you’ll still get your return in long before the April 30 deadline.

Canadians are forgoing as much as $3-billion annually by not taking full advantage of employer matching contributions within their company defined contribution (DC) pension plans, according to a recent Sun Life Financial report. One has to wonder why employees would pass up free money when there are no strings attached.

Employees in most DC plans have the option of contributing extra, and if they do, the employer makes a matching contribution on their behalf. Sometimes it is a partial match, such as 50 cents for every dollar contributed by the employee, and sometimes it is a full match. Employers offer contribution matching to encourage employees to save more for retirement.

To gain some insight into why a significant percentage of DC participants balk at contributing more, I analyzed data from a number of DC pension plans for which Morneau Shepell does record-keeping. My investigation, which encompassed tens of thousands of employee records, turned up the following:

About one third of participants in a given plan do not make an optional contribution, even if it is 100 per cent matched by the employer.

Up to two thirds will not make an optional contribution if the basic required contribution they are already making is high, such as 4 per cent of pay or more.

One would expect older employees to contribute more since they will get their hands on the employer’s money sooner. But it turns out the impact of age is quite minimal, especially if we correct for salary differences. In some groups, a fifth of the employees in their 50s do not make optional contributions.

Salary level has a big impact on optional contribution rates but only up to the average national wage level – the low $50,000s. In one case, nearly half of employees in their mid-40s who were earning under $50,000 opted not to contribute versus only 18 per cent of employees in the same age group who were earning over $50,000.

In plans where the range of optional contribution rates is limited, the employee’s decision is practically binary. The vast majority either contribute enough to earn the maximum employer matching or they contribute nothing. This suggests that deciding how much to contribute is not based on ability to pay or on perceived retirement income needs, but rather on whether or not one understands the idea behind the optional matching.

What is noteworthy is that many of the employees who elect not to make optional contributions to their DC plans still contribute to their own Registered Retirement Savings Plans (RRSPs). According to Statistics Canada data, over half of the participants in pension plans, including DC plans, also contribute to RRSPs. A rough estimate is that several hundred thousand DC plan participants are forgoing employer matching contributions in their DC plans and instead make personal RRSP contributions that are not matched.

There are ideological and social drivers that are unique to every single one of these things, and yet there is a common thread that ties them together. I call this trend “anti-spendism”.

Anti-spendism is not necessarily a social movement that is tied to the betterment of society as a whole. It’s not like socialism or communism, where we are talking about a desire to more equitably distribute wealth to the have-nots.

It is by definition, the personal, self-centered desire not to expend capital at all. Or to put a more modern take on it, rapid advances in technology have so lowered our perceptions of what things should cost, that ultimately many goods and services have become devalued far below what people are willing to pay for them.

If you’re visiting a friend’s cottage this summer, here are a few tips that will be sure to create lasting memories for everyone: Bring four very large suitcases (store one in each bedroom if necessary), bring at least two dogs (those with digestive problems are best), start a fire (preferably outside the cottage, and big enough to burn a picnic table), roast marshmallows (bring those mini ones with toothpicks and see who can stand the heat) and scare the kids (ghost stories to give them nightmares for three days can add to the fun).

Critical illness insurance is a type of protection that provides you with a lump sum payment if you are diagnosed with a covered critical illness and survive a waiting period (which is usually 30 days). With the advancement of technology more people are fortunately surviving these conditions but are often unable to get back to their pre-condition potential.

What’s the difference between disability and critical illness insurance?

Unlike disability insurance (that pays out a percentage of income as a monthly benefit), critical illness insurance actually pays out the entire tax free lump sum immediately, giving you flexibility to use the money as best needed. That’s where the critical illness benefit comes in—you are free to spend the money as you wish—such as to help cover lost income, to pay for private nursing or out-of-country treatment, for medical equipment or even to pay off your mortgage. It can help you where you need it most so you can focus all your energy on recovering.

NOTE: I have seen the benefits of this coverage first hand when my partner Tom suffered a heart attack in 2007 and fortunately had this coverage in place (although he didn’t take us to Hawaii like he said he would!!)

Could A Critical Illness Really Happen To Me?

(not the funnest facts but definitely an eye opener):

80% of heart attack victims survive
2 in 5 Canadians will develop some form of heart disease during their life time
Half of heart attack victims are under 65
153,000 new Cancer case in Canada in 2006
1 in 3 develop cancer in their life time
There are 40,000-50,000 strokes each year in Canada
One third of stroke victims are under 65
300,000 Canadians are living with the effects of stroke
Approx. 75% of all Canadians that suffer a stroke will survive but will be left with some form of disability
Sources: Heart & Stroke Foundation (2006), Canadian Cancer Society, Canadian Cancer Statistics (2006), Veterans Affairs Canada (2006)

As an independent insurance broker with Manion.ca, we have contracts with all the top insurance carriers allowing us to shop the market to find the right critical illness insurance product for you at the best price.